The causal relationship between insider ownership and market valuation is tested by
simultaneous estimation of the causes and effect of insider ownership among the largest
continental European companies. Controlling for nation and industry effects insider
ownership (measured by the fraction of "closely held" shares) is found to have a positive
effect on market valuation (market-to-book values). And market valuation is found to have a
positive feedback effect on the level of insider ownership. The findings provide empirical
support for a theoretical model proposed by La Porta et al (1999). But the results are also
found to be sensitive to owner identity: while a higher level of financial and corporate insider
ownership is found to increase market valuation, family ownership has no significant effect,
and a higher level of government ownership is found to reduce market valuation.

The causal relationship between insider ownership and market valuation is tested on a
database of the largest EU and US companies. Using a Granger causality test insider
ownership (measured by the fraction of closely held shares) is found to have a negative effect
on market valuation (measured as the simple Tobin's Q ratio). And market valuation is found
to have a negative effect on insider ownership. Consistent with an overall non-linear
relationship as hypothesised by Morck et al. (1988) and Stultz (1988), the negative effect
from insider ownership to performance is found to be significant only for companies with
high initial levels of insider ownership, but insignificant for companies with low initial
concentration levels. Furthermore, the effect on market valuation turns out to depend on
system affiliation: it is only significant in continental Europe where average insider
ownership is much higher than in the Anglo-American world (UK and US).